Aggregate demand: key terms
15 terms. Say the definition out loud, tap to check, then say whether you knew it. Back to the topic
These cards were written by the site from the specification, mark schemes and examiners' reports and are being checked by our Economics tutor; tell us if you spot an error.
Aggregate demand (AD)
The total planned spending on an economy's goods and services at a given price level in a given period: AD = C + I + G + (X − M).
Examiners say The one-mark definition was often missed: students gave 'total demand' without the components or the price level. Write the equation and name each letter.
Consumption (C)
Spending by households on goods and services, the largest component of UK aggregate demand at roughly 60–65%.
Examiners say Questions on C want a factor and a mechanism: disposable income, confidence, interest rates, wealth or the availability of credit.
Disposable income
Household income after direct taxes have been deducted and benefits added: the income available to spend or save.
Examiners say The savings question gave disposable income and a savings ratio; the calculation was 10% of the figure, with units.
Marginal propensity to consume (MPC)
The proportion of an increase in income that is spent on consumption, measured as the change in consumption divided by the change in income.
Examiners say MPC + MPS = 1. The reason-for-the-change question accepted confidence, interest rates or income distribution with a one-line explanation.
Savings ratio
The proportion of household disposable income that is saved rather than spent.
Examiners say The 2020 question on the jump in savings wanted the lockdown explanation: fewer opportunities to spend and precautionary saving, not a change in interest rates.
Wealth effect
The change in consumption that follows a change in household wealth, such as house prices or share prices, because people feel richer or poorer and borrow or spend accordingly.
Examiners say The house-price questions are the wealth effect every time. Say which way house prices moved, then what homeowners do.
Consumer confidence
How optimistic households feel about their future income and job security, which affects their willingness to spend rather than save.
Examiners say 'Confidence fell because of uncertainty' is circular. Give the cause of the uncertainty from the data: a referendum, a pandemic, rising unemployment.
Investment (I)
Spending by firms on capital goods such as machinery, buildings and technology that add to the capital stock, plus changes in stocks.
Examiners say The most-defined term in this topic's bank, and mostly defined well. Do not describe saving in a bank account as investment.
Gross and net investment
Gross investment is total spending on capital goods; net investment is gross investment minus depreciation, the amount by which the capital stock actually grows.
Examiners say A two-mark distinction that appears in the mark schemes' indicative content for investment questions.
Influences on investment
The rate of interest, business confidence and expectations, the rate of economic growth (the accelerator), access to credit, corporation tax, and demand for exports.
Examiners say The base-rate question wanted the chain: lower rate, cheaper borrowing, more projects profitable, higher investment. Most students got there; the best added confidence as a condition.
Government expenditure (G)
Spending by central and local government on goods and services, such as health, education and defence, excluding transfer payments such as pensions and benefits.
Examiners say Transfer payments are excluded from G because they are not spending on output; they affect C instead. Reports note this distinction is often missed.
Net trade (X − M)
The value of exports minus the value of imports; a trade deficit means M exceeds X and net trade reduces aggregate demand.
Examiners say The four-mark 'explain the term' question wanted the definition and a figure from the chart with its sign and date.
Influences on net trade
Real income at home (which raises imports) and abroad (which raises exports), the exchange rate, the state of the world economy, protectionism, and non-price competitiveness such as quality and design.
Examiners say 'The trade deficit fell because exports rose' restates the data. The reason is why exports rose or imports fell: a weaker pound, a recession at home, oil prices.
Exchange rate
The price of one currency in terms of another, which determines the foreign-currency price of exports and the domestic price of imports.
Examiners say A one-mark definition that many missed when it was set: 'the value of the pound' is not enough; say it is a price in terms of another currency.
Movement along and shift of AD
A change in the price level causes a movement along the AD curve; a change in any component at a given price level shifts the whole curve.
Examiners say In the 'impact of falling house prices on AD' question, the mark was for a leftward shift via lower consumption, drawn or stated.
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